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Fitch Ratings upgraded on Friday Cyprus’ long term foreign and local currency issuer default ratings (IDRs) by two notches to ‘B+’ up from ‘B-’ with a positive outlook, saying that “Cyprus has established a track record of fiscal consolidation and over-performance on its fiscal targets.”
The rating agency said that Cyprus’ senior unsecured foreign and local currency bonds have also been upgraded to ‘B+’ from ‘B-’ and the country ceiling raised to ‘BB+’ from ‘BB-’, while the short-term foreign currency IDR has been affirmed at ‘B’.
The ratings upgrade is three short of exiting the ‘junk’ status, while the Moody’s rating is at B3, or five notches below the “non-investment grade” and S&P is at BB-, just two notches below junk.
All three agencies are now expected to raise their ratings once again, following this week’s successful issue of a EUR 1 bln 10-year EMTN paper.
Cyprus previously issued a 5-year bond in the summer of 2014 and a 7-year issue this year.
In its review for the economy, Fitch now projects “a deficit of 1% of GDP for 2015 and surpluses of 0.2% and 1% for 2016 and 2017, respectively.”
At the same time it forecasts the general government gross debt (GGGD) “to peak at less than 108% of GDP this year, before falling to around 100% in 2017”.
This, it pointed out, “compares with a peak of over 130% projected by Fitch in June 2013.”
“At more than double the ‘B’ median of 43% for 2015, the GGGD ratio is still high and reduces Cyprus’ fiscal scope to absorb domestic or external shocks”, it said.
Fitch highlighted that deposits have been broadly stable since capital controls were lifted, “although non-resident deposits (30% of total) declined temporarily in the run-up to the Greek crisis this summer.”
“While direct financial links between Greek-owned subsidiary banks and Greece have been reduced significantly, the sector remains vulnerable to Greece mainly via investor confidence”, it noted.
The ratings agency said that there are still significant risks to creditworthiness posed by Cyprus’ continued deep economic and financial adjustment.
It considers that “the environment for banks remains challenging, in particular with regard to exceptionally weak asset quality.”
“The stock of consolidated sector NPEs was 47.4% of gross loans in August, the highest of all Fitch-rated sovereigns. Unreserved problem loans for the sector (ie gross NPEs minus system-wide provisions) stood at EUR 18.8 bln, or 107% of GDP for the same period,” it said.
At the same time it added that “implementation risks around banking reforms remain high as the process is dependent on the political will to confront debtors, which could wane in the run-up to parliamentary elections in May 2016.”
Government Spokesman Nikos Christodoulides welcomed the double-notch upgrade, stressing that the great effort must continue for full economic recovery.
“The government welcomes the double upgrading of the financial and credit ability of our country by the rating agency, Fitch”, he said in a statement.
He pointed out that this “development is the result of the collective effort on the part of the government, the parliament, the social partners but, mainly, of the Cypriot people.”
According to Christodoulides “the prudent and consistent economic policy and the effort for reform and modernisation bring about results and are internationally recognized.”
This great effort, he points out, must continue with the same persistence and commitment for the full recovery of the Cypriot economy to the benefit of the citizens.
House President Yiannakis Omirou also welcomed the upgrade, but warned that challenges remain and that a new comprehensive model for growth is necessary.
“The upgrade of the Cypriot economy by Fitch constitutes a positive development”, which has been achieved through the great sacrifice of fellow citizens, Omirou said.
It will enhance Cyprus’ effort to tap the markets but “problems remain and challenges are great”, he noted.
Referring to non performing loans, he pointed out that their percentage is still at a very high level. Resolving this matter while continuing to uphold social cohesion, Omirou said, will safeguard financial stability and will enable the economy to have access to funding.
Finding a solution to the NPLs will mean the return to stable and sustainable growth rates, he added.
According to Omirou there is a need “to create a new comprehensive growth model.” In this regard, he referred to financial services, shipping, energy, tourism, construction, agriculture, research and innovation pointing out that with the right strategic planning these areas can constitute the pillars of economic recovery.
Since 2011, Cyprus had been excluded from international markets due to the dramatic deterioration of its fiscal situation that subsequently led to the adoption of an economic adjustment program in March 2013.
Its exclusion from the markets, largely driven by the dire conditions of its banking system, led to the junk status grading by all three credit agencies.
Since then a remarkable improvement has been witnessed as cited by both Fitch and S&P in their latest reports, that led to the county’s upgrades.
It is expected that Cyprus will exit the adjustment programme as originally planned in May 2016 when the three-year bailout plan expires.
